Quick Thoughts: GOOG 2Q14 – In the Right Place at the Right Time


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–          The paradigmatic shift of ad dollars drove 22% topline growth for digital advertising leader GOOG. The sales beat overshadowed an EPS miss that was largely due to a higher tax rate.

–          GOOG sites revenue was up 23% and Network revenue was up just 7%, a shift that saw TAC continue downward to a 3-year low of 22.9%. Paid clicks were up a whopping 25%.

–          CPC was down just 6% YoY and stable QoQ, quieting the bears, as advertisers are growing more comfortable with mobile and demand is starting to catch up with inventory.

–          GOOG’s results show an accelerating ad spending shift toward mobile, video and social, a shift that should have long legs and that will benefit on-line rivals like FB and TWTR as well.

For a company with as much going on as Google – 13 acquisitions in Q2, a dominant mobile platform supporting dominant on-line application franchises, 32% share of global digital advertising and on-line video streaming, and an impressive stable of inherently interesting moonshot projects – its earnings conference calls leave a lot to be desired. In the tradition of its rivals Amazon and Apple, Google is “Just the facts, Ma’am” and then maybe not all of those when it comes to answering questions from Wall Street. With little else to go on, the assembled crowd hangs obsessively on Paid Clicks, Cost Per Click (CPC), and Total Acquisition Costs (TAC). Fortunately for Google investors, the story told by those metrics was a good one this quarter, driving a significant top line beat and overshadowing an EPS miss, which can be largely blamed on unexpected taxes across various jurisdictions.

Fundamentally, the business is strong.  Sales were up 22% YoY. Ad revenue on Google’s own sites, which makes up 69% of revenue, was up 23% YoY. Non-ad revenue, which includes devices, cloud services, and other non-ad businesses like Google Fiber, was up 53% YoY and is now 10% of total sales. On a regional basis, Google’s international business ex-UK, has been no less than exceptional with revenue up 31% YoY. Digging through the financials, margins were consistent with prior quarters, as Cost of Revenues, R&D, and SG&A held at stable levels as a percent of revenue. Not surprisingly the stock is up after hours.

Going a bit deeper into the bread and butter advertising revenues, Google answered its critics. In previous quarters, the total Paid Clicks continued apace but the price paid for those clicks by advertisers, the dreaded CPC metric, was dropping – down every quarter since 4Q11 as the growth of mobile devices expanded ad inventory without driving a similar growth in demand. Google’s ads are sold in real time auctions, so a mismatch of supply and demand has an obvious impact on prices. Still, the falling CPCs have led many analysts to surmise that mobile ads were inherently less attractive to advertisers than traditional desktop internet ads, leading to predictions of an endless downward spiral in ad pricing as mobile continued to grow. In 1Q14, CPC was down 9% YoY and Google bears were licking their chops for the same or worse this quarter. Oops – CPC was down only 6% YoY and, importantly, roughly stable quarter over quarter.

At the same time, Google has also ceded some advertising market share to Facebook, which arguably was ahead in figuring out ways to sell mobile to advertisers. eMarketer estimates Google’s share on mobile advertising dropped from 49.8% in 2012 to 41.5% in 2013, while Facebook grew share from 9% to 16% over the same period. While the much smaller Facebook continues to grow at a furious pace, Google held its own on Paid Clicks, which were up 25% in aggregate and an impressive 33% on Google’s own sites. CPC performance on Google sites has also been stronger in the past two quarters as the company introduces new solutions like enhanced campaigns and programmatic ad buying tools, which allow advertisers to decrease human error and boost targeting, while controlling ad spend. Programmatic ad buying, which now makes up 28% of US digital ad buying, has driven paid clicks upward and more efficiently spread available inventory.

Aside from ads, the “other revenue” bucket, which includes everything from Google Fiber, to Chromecast, to Google Cloud services, is now 10% of revenue. Chief Business Officer Nikesh Arora, who is leaving Google to Softbank, announced on his last earnings call several milestones that included sales of 1M Chromebooks to schools and that over 60% of the Fortune 500 pays for Google products. CFO Patrick Pichette also indicated the company is working with 34 cities to work on the next rollout for Google Fiber, which includes a detailed checklist with the municipality to gauge demand and efficiently build out. Though it was an interesting quarter for Google from an acquisition standpoint, nothing was mentioned about its recent acquisitions that included Titan Aerospace, Skybox Imaging, and Dropcam. Neither was much else mentioned about its non-ad business nor much to follow-on from the I/O conference and the impressive Android announcements made there. Ah well, so goes another Google conference call.

For our full research notes, please visit our published research site.

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